Drop in U.S. Jobless Rate Sign of Demographic Shift

By Shobhana Chandra -
Dec 6, 2011

The drop in U.S. unemployment so far
this year may be an early glimpse of what’s to come as the
workforce ages.

The jobless rate, which was 9.4 percent in December 2010,
declined to 8.6 percent last month, according to Labor
Department data issued Dec. 2. The report also showed payrolls
have climbed by 132,000 a month on average in 2011, around the
pace most economists say would keep the rate stable as the
population grows.

At play is a decline in the share of the working-age
population, known as the participation rate, meaning that the
economy needs to create fewer jobs to bring down unemployment.
While some of the decrease has been caused by discouraged
workers dropping out of the labor force, another driver is that
the baby-boom generation is starting to move into retirement,
according to economist Dean Maki.

“Demographic forces are the single biggest factor pushing
the participation rate down,” said Maki, chief U.S. economist
at Barclays Capital Inc. in New York and a former economist at
the Federal Reserve. “This is a bit of a slow-moving drama but
it’s likely to become more important in coming years.”

Stocks were little changed today amid concern Standard &
Poor’s will downgrade debt issued by Europe’s bailout fund. The
S&P 500 (SPX) Index fell 0.3 percent to 1,253.69 at 9:52 a.m. in New
York. A report today showed the euro region economy expanded 0.2
percent in the third quarter from the previous three months and
1.4 percent from a year earlier.

Weathering Crisis

Data in Germany today indicated Europe’s biggest economy
may weather the sovereign-debt crisis. German factory orders
surged 5.2 percent in October, the most in 19 months, the
Economy Ministry in Berlin said today.

With the debt crisis hanging over the global economy,
Australia executed its first back-to-back interest-rate cut
since 2009 today.

Payrolls in the U.S. climbed by 120,000 workers in November
after a 100,000 gain the prior month, last week’s jobs report
showed. While hiring “will step up somewhat in 2012,” Maki
said, even the current pace is enough to cause a “persistent
decline” in unemployment over the long term. He projected the
jobless rate will end 2012 at 8 percent.

Last month’s drop in the unemployment rate from October’s 9
percent reflected a 594,000 decrease in the number of people
saying they were out of work. At the same time, the labor force
shrank by 315,000, prompting a decrease in the participation
rate to 64 percent from 64.2 percent.

Discouraged Workers

The share of workers who are leaving the labor force
because they are discouraged over job prospects may be
shrinking, indicating more are departing for other reasons,
including retirement.

Americans leaving the workforce after being unemployed as a
share of all those saying they were not in the labor force
peaked at 3.6 percent at the end of 2010, drifting down to as
low as 3.1 percent in September. The number of discouraged
workers was smaller in January than in the same month the prior
year for the first time since August 2008.

The baby boom, the population bulge after World War II
between 1946 and 1964, added 9.4 million people in the 16-24 age
group during the 1960s and 7.3 million in the 1970s. Boomers
started turning 65 this year, and every day for the next 18
years, about 10,000 more will hit the age that historically has
been associated with retirement, according to the Pew Research
Center in Washington.

Fed Policy

The effect of the baby-boomer exit from the labor force
will become more evident in the coming decade, Maki said. The
policy implications may be more pressing, as Fed officials keep
interest rates near record low levels for longer than may be
required given the likely drop in the jobless rate. That may
fuel price pressures in the economy, he said.

“It means there is less slack in the economy than is
commonly perceived, and the slack will diminish more quickly
than people think,” Maki said. As a result, “there are more
inflationary risks with the very accommodative monetary policy
we have now than one might believe.”

The non-accelerating inflation rate of unemployment, the
equilibrium level of joblessness consistent with steady changes
in prices, is about 7 percent and may be reached by the end of
2013, Maki predicts. The midpoint of the Fed’s long-term
estimates issued last month puts the NAIRU at about 5.6 percent,
a level that policy makers said won’t be reached during their
forecast horizon through 2014.

Bigger Drop

“One outcome is that the unemployment rate will fall
faster than most policy makers expect,” Maki said. “That
suggests the debate over where the NAIRU lies will become
relevant much sooner than many people believe.”

To be sure, the outlook for jobs may brighten as the
economic expansion develops, drawing more people back into the
workforce and limiting declines in unemployment. In addition,
some economists argue that retiring baby boomers may not be the
best explanation for the decrease already in train in the
participation rate.

“Demographic trends are pushing down, over time, the
normal labor force participation rate,” said Michael Feroli,
chief U.S. economist at JPMorgan Chase & Co. in New York.
Nonetheless, he said, “the speed of the decline seen this year
is in excess of what one would expect just given the demographic
trend.”

Payrolls gains in the range of 100,000 to 125,000 in the
coming year will, at best, stabilize the jobless rate, Feroli
said. “In 10 to 20 years it will probably be a different
story,” he said, as the exit of older Americans brings down the
required number of payroll increases.